Business privilege and mercantile tax (BPM) is a tax assessed on the gross receipts of specific types of businesses, commonly retailers and wholesalers. Originating from the Pennsylvania Local Tax Enabling Act of 1965, this tax serves as compensation for businesses availing local governmental services, such as public safety measures.
BPM has undergone multiple changes since 1965. By 1988, the Pennsylvania Local Tax Reform Commission labeled it as a “nuisance tax,” primarily due to inadequacies in the legislative framework and vagueness surrounding the tax base. Still, jurisdictions that had existing BPM were allowed to continue its imposition.
Not all business sectors are subject to BPM. It predominantly affects retail and wholesale businesses, whereas sectors like manufacturing and financial services are generally exempt.
Today, understanding the basics of business privilege tax is crucial to multi-state compliance for your business. As regulations evolve, staying informed is essential. Let’s dive in.
Are There Different Types of Privilege Taxes?
Understanding the nuanced categories of privilege taxes is vital for compliance and optimal business operation. Here are the different types of privilege tax you might encounter. Remember that these taxes represent just a fraction of the potential financial obligations facing businesses.
Franchise Tax
Business owners pay this tax for the privilege of operating within a state. The following states currently levy a franchise tax:
- Alabama
- Arkansas
- California
- Delaware
- Georgia
- Illinois
- Louisiana
- Mississippi
- New York
- North Carolina
- Oklahoma
- Tennessee
- Texas
California’s franchise tax is situational and depends on your business type. Some states, like Kansas, Missouri, Pennsylvania, and West Virginia, have abolished it.
Accumulated-Earnings
Corporations retaining an excessive amount of earnings might have to pay this federal tax. The intent is to discourage hoarding profits and avoiding taxes. Currently, the tax rate is set at 20%.
Transaction
Also known as FTT, this tax is levied on specific financial transactions and is most commonly associated with the financial sector. This tax is found in many countries, and U.S. legislators have proposed state and federal FTT laws.
Occupational Privilege
This payroll tax is often required by various state and local taxing authorities in the United States. It’s levied on wages and serves as a way for states to recover the cost of public services that enable employment.
State Privilege (Professional Privilege)
Tennessee is currently the only state that requires this tax. It’s levied on professionals and is separate from state licensure fees and other costs. Payment is typically required annually for the right to practice within a state.
What Is the Rate of Privilege Tax?
Determining the rate of privilege tax isn’t a one-size-fits-all situation. Various factors come into play, making it important for you to pay close attention to state-specific regulations.
The rate for franchise tax can differ significantly from state to state, and even within states, depending on:
- Assets
- Gross receipts
- Net worth
- Taxable capital
- Net income
- Value of the company’s stock
In some jurisdictions, a flat rate may also be applied to each business. Rates are generally determined by the type of business activity, the city, and the county. These are usually expressed as a percentage of the transaction value.
For instance, to ascertain your privilege tax rate, you can consult the state’s rate table. But keep in mind that these rates can change monthly.
Being savvy about the rates that apply to your business is essential for budgeting and compliance. Staying updated and consulting relevant rate tables can save you from unpleasant surprises down the line.
Does My Company Need To Pay Privilege Tax?
Determining whether your company is on the hook for privilege tax is an exercise in geography and company type. Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey, notes that “Knowing your tax obligations is crucial to your business plan, and choosing to expand into another state could be more expensive than you think.”
Here’s a quick run-through to help you gauge your tax obligations.
General Guidelines Across States
With the exception of South Dakota and Wyoming, most states subject businesses to a blend of corporate income and privilege taxes.
Forty-four states, along with the District of Columbia, enforce corporate income taxes on corporations. On the other hand, 17 states extend more universally applicable privilege taxes.
Local Taxes
Keep an eye out for local governments with their own tax laws. While your state-level taxes are critical, city and county governments often want a piece of the pie, too.
For instance, major cities and their surrounding counties are particularly fond of levying their own general business privilege taxes. Starting a business in a bustling urban area could come with an extra line item on your tax bill.
Registration Requirements
Before you start counting your profits, there’s the matter of registration. States generally ask you to apply for a tax ID, fulfill your estimated income tax obligations on time, and then submit a corporate tax return when the year ends.
Interestingly, only 20 states mandate that you register before paying these taxes. After the registration process, you’re granted an identification number from the state’s revenue department to make it official.
However, there are always exceptions to this process depending on the state. Ohio and Pennsylvania’s rules are more exacting. They issue an ID applicable only to your corporate income tax account, not to be confused with other forms of state revenue.
Exemption Considerations
Let’s talk about nonprofits. Just because you’ve got a noble mission and an IRS determination letter in hand doesn’t mean you get a free pass.
Many states will welcome you into the tax-exempt club without another word — but 17 states and the District of Columbia require you to make an extra effort. They need to see additional applications or supporting documents to grant that exemption.
How To Pay Privilege Taxes
Paying privilege taxes is like trying to find the right key for a lock: it varies from place to place. In this guide, we’ll cover some state-specific rules to give you a sense of what you might encounter.
- North Carolina: The Tar Heel State does not accept online payments for privilege tax. Checks or money orders are your only avenues here.
- Tennessee: Tennessee steps up its game with a digital approach. Professionals subject to the tax can file and pay online through a specific portal. And if you find yourself in a bind, their help application addresses taxpayer queries.
- Alabama: Alabama allows payments via credit or debit card or automated clearing house transfers through the My Alabama Taxes portal. For those who prefer in-person interactions, the Alabama Department of Revenue Taxpayer Assistance Group is reachable by phone.
Different states have their own payment methods and filing requirements for privilege taxes. The key is to adhere to the state’s specific guidelines where you conduct business. Make sure you’re familiar with your state’s payment mechanisms to prevent any last-minute scrambles or penalties.
How Does Privilege Tax Help the Public?
Privilege tax may make running your business more complicated, but it has its merits for the public. How exactly does this tax contribute to society? Here’s a breakdown:
Revenue for Public Services
The most direct benefit of privilege tax is the revenue it generates for the state. This money often goes toward essential public services such as education, healthcare, and infrastructure projects.
Economic Equalizer
While not its primary aim, the privilege tax serves as an economic equalizer to some extent. Businesses are taxed based on varying factors such as assets or net worth. In essence, this tax system creates a level playing field by distributing the tax burden proportionally.
Deterrence Against Tax Evasion
The privilege tax also comes with stringent reporting requirements for corporations, which, in turn, discourages tax evasion. This transparency benefits the public by ensuring that businesses contribute their fair share to state coffers.
Fostering Corporate Responsibility
Because the tax sometimes targets excessive retained earnings, it can encourage companies to reinvest in their business or distribute profits to shareholders. This stimulates economic activity, indirectly benefiting the general populace.
Funding Local Governments
Some cities and counties levy their own business privilege taxes, directly funding local projects and services. This is particularly beneficial for densely populated areas that have unique needs separate from the rest of the state.
The privilege tax isn’t just for your business but for society as well. From sustaining essential services to promoting corporate transparency, the contributions of this tax type are far-reaching and, in many ways, invaluable to the public.
Track Tax Regulations With Mosey
Staying compliant with tax regulations is a task most of us would gladly sidestep. That’s where Mosey comes in, a one-stop compliance platform designed to turn a labyrinth of tax laws into a navigable path.
With Mosey, you’re not just getting a platform; you’re getting an entire back-office operation in a box. It’s designed to keep you in the know without having to consult an army of lawyers and accountants.
Mosey doesn’t just generalize — it customizes based on your business location and activities. Whether it’s franchise tax or privilege tax, Mosey has you covered. You’ll find your requirements across HR, payroll, tax, and registration.
